BoE Officials Sound More Hawkish as Inflation Is Set to Exceed 4%

Bank of England policymakers are now more hawkish than at any point since early 2023, according to a Bloomberg Economics measure. Financial markets are pricing in a rate increase on Nov. 5 as all but certain.

The BoE has held fire while the Federal Reserve (Fed) and European Central Bank (ECB) have moved. Its September decision to keep rates unchanged passed by a 6-3 vote, which means just two changed votes could tip the outcome.

Why Have BoE Officials Turned Hawkish?

Bloomberg Economics developed BOESPEAK, a natural language processing model that grades the tone of Monetary Policy Committee (MPC) members. A reading above zero points to hawkish sentiment, i.e. a bias toward higher rates.

The gauge moved higher after MPC members made public appearances, including at International Monetary Fund meetings in Bangkok.

Bloomberg Economics chief UK economist Dan Hanson attributes the change to energy costs.

“The rise in the index is striking and has coincided with the ramp up in energy costs in recent months”

Dan Hanson, Bloomberg

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Hanson predicts increases in November and February, though he acknowledges the committee may only be talking tough.

Andrew Bailey, the governor, holds the swing vote and says sustained high energy prices make a rate rise harder to avoid.

Deputy Governors Dave Ramsden and Clare Lombardelli have repeated that warning as the Iran war goes on.

Where Does the BoE Stand Against the Fed and ECB?

The BoE left its rate at 3.75% in September, while the Fed lifted its target range to 3.75%-4%.

Bloomberg forecasts UK inflation topping 4% early next year, double the BoE's 2% target. In the meantime, faster growth in private-sector pay before the 2027 wage round could weaken the labor market's ability to keep prices in check.

The committee is still divided, however. On Oct. 15, Deputy Governor Sarah Breeden said firms learned from 2022 to absorb costs rather than pass them along in prices. Doves Alan Taylor and Swati Dhingra, who back looser policy, argued for caution.

Raising rates in November would move the BoE in line with the Fed and ECB. Japan's central bank has already acted, with its September rate rise taking the rate to 1.25%, the highest since 1995. Investors anticipate at least four hikes by July, a trajectory Chief Economist Huw Pill has challenged.